Excerpt: - .....expenditure or trading liability incurred by the assessee, and subsequently during any previous year the assessee has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by him or the value of benefit accruing to him, shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not.' 7. this sub-section applies : (i) to sums deceived in cash or in any other manner whatsoever in respect of loss or.....

Judgment:

Sudhindra Mohan Guha, J.

1. The instant reference relates to the assessment year 1965-66, for which the previous year ended on 30th June, 1964. Herein the question posed before us is as follows:

'Whether, on the facts and in the circumstances of the case, the Tribunal was legally right in holding that the amount of Rs. 2,56,529 could not be included in the total incomeof the assessee under Section 41(1) of the Income-tax Act, 1961?'

2. During the accounting year, the assessee transferred Rs. 3,45,000 out of the suspense account running from 1946-47 to 1948-49 to its capital reserve account. The ITO found that out of the above sum, an amount of Rs. 2,56,529 represented liabilities for expenses which had been allowed in the earlier years. By applying Section 41 of the Act, he included this amount in the total income of the assessee.

3. When the assessee went up in appeal before the AAC, he confirmed the view taken by the ITO.

4. The assessee came in further appeal to the Tribunal and contended that factually the amount included was not correct because the assessee paid back the liabilities with regard to unsecured loans of Rs. 36,000, commission on sugar sales amounting to Rs. 37,895 and interest on unsecured loans to the extent of Rs. 4,142 and that the amount of Rs. 15,000 was paid off with reference to Amina Khatoon on 22nd February, 1951, the amount of Rs. 10,000 with regard to Iqbal Ahmad on 16th January, 1964, and the amount of Rs. 5,000 with reference to Begum Barunnessa on 17th January, 1964. The assessee, however, did not give the date with reference to the loan paid off with regard to Dureswar.

5. The Tribunal, having regard to the contentions of both parties, was of opinion that the liabilities for expenses arose for 1948-49 and these amounts became barred by limitation. With reference to certain decisions, to which we would make reference later on, the Tribunal was of the view that the amounts could not be brought to tax because Section 41 stipulates that as regards the trading liabilities, it is only upon remission or cessation that Section 41(1) of the Act applies. When the liability becomes barred by the law of limitation, there is neither a remission nor a cessation of the liabilities. The liabilities are not extinguished. It is accordingly held that the amounts in question cannot be taxed under Section 41(1) of the Act as the income of the year even if the assessee credited these amounts to the profit and loss accounts.

6. On this background, the question mentioned before was referred. In order to deal with the question, reference is to be made to the provisions of Section 41(1) of the I.T. Act, 1961, which reads as follows :

'Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee, and subsequently during any previous year the assessee has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by him or the value of benefit accruing to him, shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not.'

7. This sub-section applies : (i) to sums deceived in cash or in any other manner whatsoever in respect of loss or expenditure which had once been allowed or deducted in the computed profits in any previous year, (ii) to the benefits obtained by a remission of debts or a cessation ofliability, if the debt or liability has once been allowed or deducted. Such conditions for the application of Section 41 were also laid down in the case of Bhagwat Prasad & Co. v. CIT : [1975]99ITR111(All) . In that case it was held that Section 41 of the I.T. Act would apply if two conditions were specified : (1) that the amount must have been allowed as a deduction in some earlier year, and (ii) that during the assessment year in question the assessee must receive some benefit by way of a cessation or remission of liability.

8. It follows, therefore, that under the provisions of Section 41(1) of the Act, the I.T. Dept. taxes as income what it had earlier allowed as a deduction. It creates a liability to tax only in those cases where an allowance had been actually granted.

9. Mr. S. K. Mitra, learned advocate for the Revenue, points out that the board of directors in their meeting held on 6th January, 1964, resolved that the non-payable credits be written off by 30th June, 1964, and by virtue of such resolution the credit balances in the suspense account were transferred to the capital reserve account and, therefrom, to the profit and loss appropriation account on 30th June, 1964. According to him, this amount was treated by the assessee as its income which again was to be districted as dividend and that would attract the provisions of Section 41(1) of the Act. By its conduct, the assessee had treated its liability to have ceased to exist. Mr. Mitra then contends that according to the Oxford Dictionary 'cessation' means ceasing, discontinuance or stoppage, and the provision of this section will apply to the benefits obtained by a cessation of liability which had once been allowed or deducted. Reliance was placed in this connection on the decision of the Allahabad High Court in the case of Indian Motor Transport Co. v. CIT [1978] 114 ITR 677. In this case, the assessee carried on business in road transport. On 31st March, 1970, it transferred a sum of Rs. 24,869 to its profit and loss account. This sum represented two items, Rs. 8,672 represented credits in the unclaimed wages account and Rs. 16,197 stood to the credit of certain persons who had business dealings with the assessee. Those persons had not come forward to demand payment of the amounts due to them and consequently their accounts were debited and correspondingly the profit and loss account of the assessee was credited. This was done on 31st March, 1970, which fell in the assessment year 1970-71. The ITO found that the assessee had credited the above amounts to the profit and loss account when they remained unclaimed for a number of years and there was no hope of these being claimed. The assessee had itself claimed the sums as its income. Hence, the sum was liable to tax. He included the sum of Rs. 24,869 to the income of the assessee.

10. The assessee went up in appeal. The AAC held that though the concerned persons had not come forward to demand payment, yet, in law, they could, till three years after 31st March, 1970, for, it was up to that date that the assessee had admitted its liability to pay. Therefore, even if the amounts were credited to the profit and loss account that would not become the assessee's profit under Section 41(1). The above addition was accordingly deleted.

11. The ITO went up in appeal to the Tribunal. The Tribunal held that the conduct of the assessee in transferring the amounts from the accounts of the creditors to the profit and loss account, after debiting the creditors' account, showed that the assessee treated these amounts as its income. It was hence taxable as income even without resort to the deeming provisions of Section 41(1) of the Act. On a reference, it was held by the High Court that Section 41 of the I.T. Act, 1961, would apply if two conditions were satisfied, (1) that the amounts must have been allowed as a deduction in some earlier years, and (2) that during the assessment year in question, the assessee must receive some benefit by way of a cessation or remission of liability. Both these conditions were satisfied in the present case : [1988]114ITR677(All) . The amounts in question had been allowed as deduction in the past years. The inference of fact drawn by the Tribunal from the conduct of the assessee was that the assessee itself treated these amounts as its income because it felt that the claimants were not likely to come forward to make demands. This necessarily implied that the assessee had treated its liability to have ceased to exist at least on March 31, 1970. The Tribunal was justified in holding that the amounts in question were liable to be assessed under Section 41(1) of the Act.

12. On behalf of the Revenue reference is also made to another decision of the Allahabad High Court in the case of Pioneer Consolidated Co. of India Ltd. v. CIT : [1972]85ITR410(All) . It is held therein that money due by the assessee-company to its constituents, not claimed by them, and transferred to the profit and loss account of the company, was income of the assessee in the accounting year in which it was so transferred.

13. Mr. Mitra thus stresses much emphasis on the conduct of the assesseewhich treated the amount in question as its income because it was surethat the claimants were not likely to come forward to make demands ofthe barred debt. Mr. D. K. Dey, the learned advocate for the assessee, argues thatwhen a liability becomes barred by the law of limitation, there is neither aremission nor a cessation of the liability, the liability is not extinguished,and only the creditor's remedy becomes barred. Therefore, if the amount ofa trading debt was allowed as an expense to an assessee, the amount cannotbe taxed under the sub-section as the income of the assessee because thedebt due by the assessee becomes time-barred. Our attention was drawn to the observations made in the decision in the case of Kohinoor Mills Co. Ltd. v. CIT : [1963]49ITR578(Bom) . In this case the assessee, a limited company, carried on business as a manufacturer of textile piece goods at all material times. A large number of labourers and workmen had been employed by the company for the purpose of its business. In certain years, however, certain wages due to the labourers and workmen were not paid to them because some of them did not turn up to receive therm Previously it was the practice that such amounts of wages remaining unclaimed for a period of three years were added back to the profits of the assessee after the expiry of three years. It appears that the amount of wages, which had become due to the labourers and workmen but were not claimed by them, amounted to Rs. 30,190. The I.T. authorities added that amount in the income of the relevant assessment year on the ground that the liability to pay the amount to the labourers and workmen had ceased by reason of the expiry of the period of three years.

14. It is held by the Bombay High Court that where the wages are payable but they are unclaimed and their recovery is barred by limitation, the position in law is that the debt subsists, notwithstanding that its recovery is barred by limitation. There is in such a case no 'cessation of trading liability' within the meaning of Section 10(2A) and (he amount of such wages cannot be added to the income. In this case reference was also made to the decision of the. Supreme Court in the case of Bombay Dyeing & . v. State of Bombay, reported in [1958] SCR 1122 corresponding to : (1958)ILLJ778SC . In this case it is held by the Supreme Court that when a debt becomes time-barred it does not become extinguished but only unenforceable in a court of law. Indeed, it is on that footing that there can be a statutory transfer of the debts due to the employees and that is how the Board gets title to them. If then a debt subsists even after it is barred by limitation, the employer does not get, in law, a discharge therefrom. The modes in which an obligation under a contract become discharged are well defined and the bar of limitation is not one of them.

15. On the basis of the decision referred to above it is contended by Mr. De that when a liability becomes barred by the law of limitation, there is neither remission nor cessation of the liability, the liability is not extinguished, only the creditor's remedy becomes barred. In support, of such contention reference is made to the decision of the Bombay High Court in the case of J. K. Chemicals Ltd. v. CIT : [1966]62ITR34(Bom) . He draws our special attention to p. 41 of the report wherein the Chief Justice, Tambe, discusses the principles for the purpose of attracting the provisions ofSection 10(2A) of the Indian I.T. Act, 1922, which corresponds to Section 41(1) of the present Act. It would be of some advantage to quote the passage (p. 41 of 62 ITR :

'The transfer of an entry is a unilateral act of the assessee, who is a debtor to its employees. We fail to see how a debtor, by his own unilateral act, can bring about the cessation or remission of his liability. Remission has to be granted by the creditor. It is not in dispute, and it indeed cannot be disputed, that it is not a case of remission of liability. Similarly, a unilateral act on the part of the debtor cannot bring about a cessation of his liability. The cessation of the liability may occur either by reason of the operation of law, i. e., on the liability becoming unenforceable at law by the creditor and the debtor declaring unequivocally his intention not to honour his liability when payment is demanded by the creditor or a contract between the parties, or by discharge of the debt--the debtor making payment thereof to his creditor. Transfer of an entry is neither an agreement between the parties nor payment of the liability.'

16. These are the best reasonings to which we are most respectfully in agreement. Again, this decision was also followed in a recent case, viz., CIT v. Sadabhakti Prakashan Printing Press (P.) Ltd. : [1980]125ITR326(Bom) .

17. It has been pointed out earlier that it was found by the Allahabad High Court that the reversal of the entries on the part of the assessee in its profit and loss account would have the effect of showing the amount as income and, thus, there would be a 'remission or cessation' of the liability. We are unable, with due respect, to accept the view taken by the Allahabad High Court in the cases referred to above.

18. In view of the discussions made above we are of the opinion that there can be a cessation only on the bilateral acts by both the creditor and the debtor or by a refusal of the debtor to honour his liabihty when pressed for the dues or by a discharge of the debt by making payment of dues. In no case a debtor can bring the liability to an end on his own volition. Thus, we are of the opinion that the Tribunal was right in holding that there was neither a remission nor cessation of the trading liabilities in this case and, thus, the provisions of Section 41(1) of the Act would not be attracted.

19. In the premises, we answer the question in the affirmative and in favour of the assessee.